AMDP Investment Proposal

To: Clark Hansen, CEO, AMDP
From: Ocean Salazar-Ferrer, Research and Development Analyst
Date: February 25th, 2019
Subject: Salesforce.com Inc. (NYSE: CRM), Recommendation: Buy

AMDP Investment Philosophy

AMDP is an investment firm that focuses on companies that are committed to doing business in a socially responsible, environmentally sustainable, and profitable manner. Guiding terms and concepts of this philosophy are defined below.

Triple Bottom Line:

The triple bottom line aims to measure corporate impact on people, the planet, and profit to promote corporate social responsibility (CSR) (The Economist). The three “bottom lines” are defined below.

1)   People:

The corporation’s employees, community, and other people that interact with the corporation.
·     E.g. employees, community around company HQ and stores

2)   Planet

The corporation’s environmental and ecological footprint on the planet.
·     E.g. CO2, Methane, environmental ecosystem effect

3)   Profit

The traditional measure of a firm’s profitability, measured in a way that does not diametrically oppose it to People or Planet.
·     E.g. IKEA maximizing profit by recycling waste into some best-selling products

Corporate Social Responsibility (CSR)

Corporate Social Responsibility is a broad concept that aims to better sustainable development, the environment, and corporate stakeholders (Financial Times).
-      Internally regulated
-      Emphasis beyond profit maximization
-      Considers interests of clients, communities, the environment, and employees
-      E.g. “B-Corps” are corporations that legally have a fiduciary duty to maximize value for all of their stakeholders rather than pure profit

 

Social Enterprise

A social enterprise is an organization that commits to fulfill unmet needs and promote the Triple Bottom Linethrough:
1)   Opportunity Employment: employing people who have barriers to mainstream employment.
2)   Transformative Products or Services: creating an environmental and/or social impact through new products and services.
3)   Donate Back: contributing a portion of profits to nonprofits that address basic unmet needs

 

Carbon Footprint

Carbon footprint is the amount of CO2 and other carbon compounds emitted due to the consumption of fossil fuels by a corporation (Carbon Footprint Ltd).

Salesforce.com Inc. (NYSE: CRM)

Salesforce.com, Inc. develops enterprise cloud computing software with that focuses on customer relationship management (CRM). The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices (Bloomberg L.P.). Their product facilitates sales and customer relations for startups, companies, non-profits, and other organizations.

Executive Summary

Salesforce is a recently public company exhibiting strong revenue and profitability growth, driven by their consistent execution and competitive advantage. Furthermore, they align with AMDP’s investment philosophy by exhibiting strong corporate social responsibility through their adaptation of the 1:1:1 model. Credit Suisse analysts have rated the company as an “OUTPERFORM” and the New York Times has praised them for being champions of community and social causes.

Investment Attractiveness

Salesforce has exhibited strong revenue and EPS growth over the past 4 years. Their projected compounded annual growth rate (CAGR) is 20%, with a revenue target of $21-23B for FY22. Their software as a service (SaaS) business model has high gross profit margins, which have been stable above 70%. Based on their momentum and growth characteristics, Salesforce is a strong buy. Furthermore, their competitive advantage in the growing market of cloud-based servicesmakes them an attractive long-term investment.

Key Financial Figures
Cloud-based services market
-      CRM enterprise software addressable market is growing faster than operating systems, ERP, and database
-      90%of enterprises will use multiple cloud services and platforms by 2020
-      $140bn: Current total available market of Salesforce
-      19.6%:Salesforce market share of CRM market (Oracle 7.1%, SAP 6.5%, Microsoft 4.0%)
Growing Revenue and Earnings
-      SaaS model:
-      SalesforceNet-New Annual Recurring Revenue (ARR) is revenue measure
-      $10.48bn: Revenuefor FY18
-      $1.34: Trailing Twelve Months Earnings per Share (EPS)
-      25%+: Revenue growthYoY from 2014-2018 (figure 2)
-      $484 million:GAAP incomefrom operations

Credit Suisse Recommendation

Credit Suisse analysts, Brad Zelnick, Bhavin Shah, and Kevin Ma rate Salesforce.com (NYSE: CRM) as an OUTPERFORM. The cite “accelerating organic billings” and “broad based demand across all clouds” as key reasons for their recommendation (Zelnick, Shah and Ma).
-      $175.00 price target (as of 27-Nov-2018)
-      $16bn FY20 revenue estimates
-      Salesforce has since rallied to $163.65/share

Investment Philosophy Alignment

Salesforce has been ranked one of the most socially responsible corporations in the United States (Payseno). Their 1:1:1 model emphasize all three parts of the triple bottom line while promoting social enterprise and being carbon footprint-conscious.

Salesforce 1:1:1 Model

The 1:1:1 model comprises of Salesforce giving time, equity, and product for social good.
1)   Time: Gives 1% of employees paid days/hours for volunteering.
3.3M+ hours volunteered so far
2)   Equity: Gives 1% of company equity for charitable cause.
Salesforce has given $230M+ in grants given through the Salesforce Foundation
3)   Product: Gives company product to nonprofits and educational institutions
Salesforce has given 37k+ nonprofit institutions product access

Corporate Social Responsibility and Local Living Economy in San Francisco

§ Salesforce largest private employer in San Francisco
§ Formed coalition of San Francisco businesses to support tax increase to decrease homelessness
§ $100,000innovation grantsto middle school principals
§ CEO Benioff pledged $100 millionover a decade to San Francisco Unified School District
§ Net-zero greenhouse gas emissions, providing clean cloud for customers
§ $2.1mspent on lobbying for issues such as equal pay, equal rights, education, immigration, privacy and security, and more

New York Times Recommendation

The New York Times has praised Salesforce on their efforts to bridge the gender pay-gap in Silicon Valley and their push for higher taxes to solve homelessness in San Francisco. Nicole Perloth highlighted how Salesforce’s efforts against homelessness in San Francisco have “put Silicon Valley on spot” (Perloth). Salesforce “challenged 20 companies to pledge $500,000 and eventually expand the program to $100 million” (Perloth). The goal of Salesforce was to improve the local living economy of San Francisco. 

Top Risk Factors

§ Slowing revenue growth: Salesforce outlines multiple scenarios where revenue growth slows with market saturation. Slower growth will result in increased leverage to support the SaaS business model.
§ New privacy concerns and laws changing regulation for cloud computing couldhinder growth and viability.
§ Failure to realize profitability in acquisitionssuch as Mulesoft, Demandware, ExactTarget, xkrux, and Quip.
§ Failure to expand beyond the CRM marketwill reduce revenue growth rate and harm business.
§ Potential loss of management team members in the future could harm growth and consistency of execution.

Final Recommendation

Salesforce is a fast-growing company that aligns with AMDP’s values and investment philosophy. Their strong sales and earnings growth shows momentum that will be reflected in Salesforce’s future share price. Salesforce.com Inc. (NYSE: CRM) has performed well over the past year, gaining roughly 40% (figure 1) and outperforming the NASDAQ by more than 35%. Based on the Fama-French-Carhart four-factor model, stocks exhibiting these momentum characteristics tend to consistently outperform the market. I recommend we open a position, going long on NYSE: CRM shares.




 

Appendix



Figure 1
Source: thinkorswim

Figure 2
Source: thinkorswim






Works Cited

Bloomberg L.P. "Company Overview of salesforce.com, inc." 26 February 2019. Bloomberg.February 2019. <https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=122917>.
Carbon Footprint Ltd. "Welcome to Carbon Footprint." 2019. Carbon Footprint.February 2019. <https://www.carbonfootprint.com>.
Financial Times. "Definition of corporate social responsibility (CSR)." n.d. Financial Times.February 2019. <http://lexicon.ft.com/Term?term=corporate-social-responsibility--(CSR)>.
Payseno, Kaya. "Top 20 Corporate Social Responsibility Initiatives of 2018." 28 June 2018. Hiring Success Journal.28 February 2019.
Perloth, Nicole. "With New Antipoverty Initiative, Salesforce C.E.O. Puts Silicon Valley on Spot." 7 March 2014. New York Times.2019 28 February.
Salesforce.com Inc. "Investor Update, Octoper 2018." Investor Update. San Francisco: Salesforce.com Inc., October 2018. Pitch Deck.
The Economist. "Triple Bottom Line." 17 November 2009. The Economist.February 2019. <http//www.economist.com/news/2009/11/17/tiple-bottom-line/>.
Zelnick, Brad, Bhavin Shah and Kevin Ma. F3Q Acceleration, Broad Based Strength. Equity Research. London: Credit Suisse (Europe) Limited, 2018.



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